Covid-19 has held up developments in M&A in the retail and consumer sector, but paradoxically it will also magnify and accelerate broader deal-driving trends already apparent before the pandemic. PwC’s recently published global M&A insights are backed up by what we’re observing in Switzerland.
Three main themes driving M&A:
Building in super-resilience
We see mergers and acquisitions as a key factor in the recovery of the economy – in Switzerland and internationally. Many businesses will have to repair in the wake of the crisis. Even those that have survived unscathed have recognised their inherent fragility and will be using M&A to reconfigure to become more diversified and resilient – or to capitalise on recent growth.
Redefining the core
Even without coronavirus, major macroeconomic trends have been shaping up in recent months and years that look set to gather momentum again once the dust has settled. Consumer preferences are shifting even more rapidly towards digital solutions. The Millennials are turning their back on material objects and often prefer to spend their money on experiences. These and other related developments are forcing retailers – particularly those in fast-moving retail goods and grocery – to constantly redefine their core business, using M&A to bolt on new competencies or divest non-core markets and product categories.
Buying into the rule-breakers
And then there are the rule-breakers: businesses driving the shift to e-commerce, direct-to-consumer and subscription models, automation, sustainability and the “experience over things” trend are potential M&A candidates, as are disruptive operators capitalising on consumers’ closer focus on environmental, social and governance issues in the wake of Covid-19. At the same time, bricks-and-mortar non-food retailers in particular will be looking to repair and reconfigure by buying or selling off specific areas of business.
With such major change and uncertainty afoot – and, as the graph suggests, plenty of pent-up M&A demand after a major decline in activity − expect to see a wealth of attractive opportunities emerging in the next six to twelve months.
Global consumer markets deal volumes and values
What about M&A in the Swiss retail and consumer sector?
Zooming in on Switzerland, already before Covid-19 we were seeing the retail environment undergo structural changes due to competition from online and cross-border shopping, with non-food retailers reducing their store networks, being sold and/or forced to close down. The presence of so many non-food retailers on the market brought down M&A prices. After the lockdown, the non-food retail sector rebounded beyond expectations as consumers rushed back into the stores and took advantage of heavy discounts. For the reminder of the year, we expect a stabilisation of the non-food retail market, with pre-Covid industry dynamics returning into focus and actually being accelerated.
Food retailing did well during the lockdown for the obvious reason that people needed to eat and drink while staying at home. This was particularly true for online retailing, where demand regularly exceeded online retailers’ supply and delivery capacities.
On the consumer side, suppliers to the retail industry obviously did better than suppliers to the hospitality sector. While we have seen only very little M&A activity emerging from this so far, in the coming months we can expect to see an increase in distressed situations and consolidation plays.
“Covid-19 has merely accelerated a radical transformation of the retail and consumer sector driven by major economic, technological and demographic trends. Once the dust has settled, I expect to see increased M&A opportunities emerging – more in consumer goods than in retail.”
To summarise: shaken, but ready for action
As the effects of Covid-19 pan out, M&A will be a key driver of economic recovery as consumer sentiment recovers and large volumes of private equity seek a home.
Given that retail, hospitality and leisure have been particularly hard hit by the uncertainty around Covid-19, we expect these sub-sectors to see more restructuring activity in the next 6 to 12 months, with distressed asset sales and consolidation combining with portfolio reviews at big corporates to drive deals in this sector.